The 20-lakh crore special package from the central government has evoked mixed responses. Finance Minister (FM) Nirmala Sitharaman has gone on record stating that the magnitude of the economic impact of the lockdown is yet to be measured, indicating the severity of the crisis.
The government’s call
According to Sitharaman, the package has been designed so that enterprises can approach banks and access additional working capital. They can also have access to increased term loans without increased collaterals. Explaining the rationale behind this approach, Sitharaman stated, “When these companies restart, they will have fixed costs they need to first attend to and then go forward.” According to the FM, availability of these loans will help enterprises to restart their businesses.
Addressing the concerns of the trading segment, central finance ministry sources have said that the financial package will include businesses, which are not registered as micro, small and medium enterprises (MSMEs). The announcement will bring relief to the Indian trading and retail community who can avail now loans through the Guaranteed Emergency Credit Line (GECL).
How will the banking sector take it
There is another critical point of concern. The package depends overtly on the banking sector’s capacity of giving loans. The Indian banking system is presently loaded with non-performing assets (NPAs). Exposing it to another set of risky loans - given in a difficult financial setting - may lead to heightened risk for the banking sector.
According to Joydeb Dasgupta, Secretary, West Bengal, Bank Employee’s Federation of India, “The total NPA in the banking sector is now around 10-lakh crore. There is another 12-lakh crore in the stressed category. The Indian banking sector is already under severe strain and has been recording a net loss for four consecutive years. This is despite different banks recording operational profits and can be linked to provisioning. The central government had initiated a revival plan for 11 stressed banks in April, 2017. That plan included various structural changes. However, the results have not be up to the mark. The government must ensure corporate repayment of loans to preserve the efficiency of the Indian banking system.”
Addressing the need of infusing liquidity in the economic system, this financial package includes a Rs. 30,000 crore special liquidity scheme for non-banking financial institutions (NBFCs) to provide credit support. Additionally, another Rs. 45,000 crore partial credit guarantee scheme (where, in case of a loss, the first 20% of the loss will be bourne by the Indian government) was also launched for the NBFCs, housing finance companies (HFCs), and microfinance institutions (MFIs) with low credit ratings. According to government sources, these securities are fully guaranteed by the government and would ensure liquidity for these institutions and boost confidence in the market. Under weak economic circumstances, these institutions are finding it difficult to raise money from the debt market and this provision may help them to gain liquidity. The partial credit guarantee scheme can allow these institutions to give fresh loans to micro small medium enterprises (MSMEs) and to individuals.
Commenting on the move, Hemant Kanoria, Chairman, Srei Infrastructure Finance Limited, a leading NBFC company, stated, “I think the liquidity issue will partly get alleviated but not be resolved. With this liquidity coming in, most banks and NBFCs will try to adjust overdues before providing extra liquidity to customers. The Reserve Bank of India (RBI) should have allowed a one-time loan restructuring and the immediate requirement of the borrower could have been addressed. The present Non-Performing Loan (NPL) or the overdue, which are there, need not have been settled. Those could have been given an extended period for settlement. The excess liquidity could have been used for restarting entrepreneurship. Around 60%-70% of our clients have called us for restructuring. Our company has not been financing consumer durables or consumer loans but assets which are used for production or for generating employment. Since all productive cycles have come to a standstill in the lockdown, the cashflow of all these companies have got affected.”
He added, “Lenders need to be careful about the credit history of the borrowing companies. However, there are a lot of companies which are now in the stressed categories because of interrupted cash flows. The government has addressed the larger issue but the operational issue of allowing all the borrowers to go through a one-time restructuring is the most important thing.”
Real estate provisions
The enhanced liquidity provision can also help the real estate sector. There have been certain regulatory relaxations as well. Commenting on the issue, Harshavardhan Neotia, Chairman, Ambuja Group, informed BE, “The FM’s package for the financial sector will provide liquidity support to the NBFCs and mutual funds and boost confidence in the market. Most of the declared measures will have strong medium to long term impact. The provision to extended the timeline for project completion and registration by six months will also help the real estate sector and enable home buyers to get delivery of their booked houses within the new timelines. The 25% TDS reduction will benefit existing home buyers as it will leave additional money in their hands. However, the absence of any direct demand stimulus for the real estate sector is a cause of concern. The tourism and hospitality industry has no cash flow and does not expect any change in fortunes at least till mid 2021 – depending on the treatment of the pandemic. Apprehension in people’s mind coupled with a weakened economy will make things difficult for the tourism and hospitality industry. Focused governmental intervention will be necessary to turn the industry around.”
Rahul Todi, Director, Shrachi Group, told BE, “Compared to the global stimulus packages announced it seems India has not done much but the implications in the medium term will be tremendous. The government, over the past two months, has announced several measures to revive the economy and tried to provide the necessary stimulus. The measures announced will have strong medium to long term impact and can attract global investment. India will be able to take advantage of the shift in global supply chain re-alignments. Additionally, the measures announced by the RBI take care of the short-term stress which most businesses are facing.”
Will the declared taxation benefits help the economy to recover
The stimulus package also includes certain changes in the tax structure. The FM has declared TDS and TCS rate cuts. There has been a cut of TCS for specific receipts including payment of dividend from May 14 to March 31. Additionally, TDS for non-salaried specific payments have been reduced by 25%. According to Samir Gupta, Senior Advisor and Financial Planner, Insurewala, an insurance and financial consultancy firm, “The announcement will provide benefit to the self-employed professionals and senior citizen earning interest and rental income. However, no relief has been provided to the salaried employees. Additionally, it should be noted that the reduction in rates of TDS and TCS will not have any impact on the ultimate tax liability payable by the taxpayer.”
The central government has decreased the rate of contribution to the Employees Provident Fund (EPF) by both the employers and employees to 10% against the statutory 12% for three months. According to Gupta, “More money in hand is good for those who are in dire need of cash amid the coronavirus pandemic. However, it also means a rise in tax liability.”
He added, “The Rs. 30,000 crore package will entail investing in investment-grade debt papers of companies. This will support the measures of the RBI to provide liquidity. It will also help mutual fund companies as there will be buyers for the papers these mutual funds hold. This is significant for investors in medium-to-long term debt mutual fund schemes. It will turn their investments into funds where lower grade papers which have been bought would have a liquidity cushion and support the bond prices.”